Central Bank UCITS Regulations clarify CP86 location rules and other matters

The Central Bank of Ireland (Central Bank) signed the Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Undertakings for Collective Investment in Transferable Securities) (Amendment) Regulations 2017, S.I. No. 344 of 2017, (the Central Bank UCITS (Amendment) Regulations 2017) on 27 July 2017 and these amending regulations are now in force. The Central Bank subsequently published Issue 6 of its Markets Update  on 4 August 2017 with an updated UCITS Q&A and updated Guidance on UCITS Financial Derivative Instruments and Efficient Portfolio Management.

While the Central Bank UCITS (Amendment) Regulations 2017 set out consequential amendments following the implementation of UCITS V, as well as some technical changes (summarised below), they are of particular value in clarifying some of the requirements which derive from CP86. CP 86 is relevant for UCITS management companies; Self-managed UCITS investment companies/ICAVs; Authorised AIFMs; and Internally managed AIF investment companies/ICAVs (each referred to as a Fund ManCo and collectively Fund ManCos).

CP 86 Location Rule

The location rule is one of the requirements which is intended to enable the Central Bank to effectively supervise Fund Mancos. The requirements set out in the Feedback Statement on CP 86 in respect of the location rule were that

 - a Fund ManCo with a PRISM impact rating of Low (which would capture most Fund ManCos) will be required to have at least:

  • two Irish resident directors;
  • half of its directors resident in the EEA; and
  • half of Managerial Functions performed by at least two designated persons (DP) resident in the EEA; and

 - a Fund ManCo with a PRISM impact rating of Medium Low or above will be required to have at least:

  • three Irish resident directors or two Irish directors and one DP based in Ireland;
  • half of its directors in the EEA; and
  • half of Managerial Functions performed by at least two DPs resident in the EEA.

The location rule (as now enshrined in law by virtue of Regulation 15 of the Central Bank UCITS (Amendment) Regulations 2017) has been changed to expand the above requirements for residency in the EEA to include "or such other country as the Bank may, taking into account criteria regarding effective supervision, determine". The Central Bank will thus have more flexibility to determine that countries which are outside the EEA meet the necessary requirements. This flexibility is very welcome.

We anticipate that the updated requirements in respect of the location rule will also be reflected in an updated AIF Rulebook in due course.

CP86 Record Retrievability Rule

As anticipated by the CP86 transitional arrangements, and now enshrined by virtue of Regulation 24 of the Central Bank UCITS (Amendment) Regulations 2017, the  arrangements which ensure  a Fund Manco keeps its records in a way that makes them "immediately retrievable in or from the State" must be in place by 1 July 2018 or such later date that the Bank may specify in writing.  This deadline also applies to compliance with the location rule, revised managerial functions and organisational effectiveness role.

 Other Changes

  • Anti-dilution levy. Flexibility to include the preservation of the net asset value per share of the UCITS has been included by virtue of Regulation 3 of the Central Bank UCITS (Amendment) Regulations 2017.
  • Subsidiaries. The conditions which must be satisfied by a UCITS when establishing a subsidiary are enshrined in law by virtue of Regulation 5 of the Central Bank UCITS (Amendment) Regulations 2017.
  • Prospectus Disclosure of Long/ Short positions. More flexibility regarding prospectus disclosure of long /short positions is now possible by virtue of Regulation 11 of the Central Bank UCITS (Amendment) Regulations 2017.
  • Depositary Requirements. Rules on depositaries are revised by virtue of Regulations 17 to 23 and 30 of the Central Bank UCITS (Amendment) Regulations 2017.
  • Disclosure of open FDI positions in a UCITS' annual and half-yearly report. Flexibility to disclose on a condensed basis is permitted where the volume of these positions is high by virtue of Regulation 28 of the Central Bank UCITS (Amendment) Regulations 2017. The Central Bank has updated its Guidance on UCITS Financial Derivative Instruments and Efficient Portfolio Management  to include (page 32) an additional provision on disclosure requirements for FDI in periodic reports.  
  • Disclosure regarding deduction of EPM fees and expenses from revenue. Flexibility to disclose in a UCITS prospectus or annual report  is permitted by virtue of Regulation 9 of the Central Bank UCITS (Amendment) Regulations 2017.

Central Bank UCITS Q&A

On the 4 August 2017, the Central Bank published a Nineteenth Edition of its Central Bank UCITS Q&A.  New Q&A 1079 - 1083 relate to the Central Bank UCITS (Amendment) Regulations 2017 and concern; initial capital requirement for depositary; how one computes half of a board of directors where the number of directors is uneven; meaning of reverse leverage; and where cash booked in accounts and held as ancillary liquidity may be held. Q&A 1084 relates to the governing law of management company agreements.

 

For more information please contact a member of the Asset Management & Investment Funds Team.

Date published: 9 August 2017